What is an Angel Investor?
An angel investor, who might also be called a private investor, a seed investor, an angel funder, or a business angel, is a high net worth individual who provides financial backing for startup businesses and entrepreneurs. This investment may either be a one-off injection to help a venture get off the ground, or an ongoing system of support to help a new company through those difficult early stages.
Typically, an angel investor will be looking to invest in a startup while it’s still in the process of setting up and getting up and running. These investments are usually risky and don’t usually represent more than 10% of an angel investor’s portfolio. Most angel investors will also be wealthy in their own right and have excess funds available for these projects.
Becoming an Angel Investor in the UK
To become an angel investor in the UK, you will normally need to meet the criteria required to identify as a “sophisticated investor”, though not everyone who identifies as a sophisticated investor will choose to become an angel investor.
The definition of a sophisticated investor includes individuals who can claim one of the following:
- They’re an existing member of a club of angel investors, or a business angel syndicate
- They’ve got a professional background in private equity, venture capital, or the provision of finance
- They have prior experience of investing in unlisted companies
- They’re a company director whose business has a turnover exceeding £1m
Because angel investors will need to be at a certain stage in their career and have a large amount of experience that they can bring to the table in order to advise entrepreneurs, they will also tend to be aged 40 or above.
If you want your new business to succeed in the long run, it’s important to remember that angel investors are there to offer advice and to act as mentors, just as much as they are wealthy individuals who can provide the capital your venture needs.
Where Does the Name Come From?
The term “angel” was first used on Broadway, when rich theatregoers would use their money to back producers looking to find funding for their plays. This funding would then be paid back in full, plus interest, once the productions had started generating revenue.
The full term “angel investor” was first used in 1978 by William Wetzel of the University of New Hampshire, who was also the founder of the Center for Venture Research. He used it when completing a study on how entrepreneurs raised capital, using it to describe backing investors who’d supported businesses over the years by providing seed capital.
What Do Angel Investors Expect in Return?
When thinking of working with an angel investor to help your own business take off, it’s only natural to wonder what they will expect in return. The answer to this can differ, depending on the person you choose to work with. In many cases they will be looking for ownership equity in the company you’ve started and a higher return on their money than they’d get if they were to invest it in stocks.
It’s also possible that an angel investor won’t see a positive return at all from an investment, which is why it’s important for them to have an interest in the startups they provide money for that goes beyond financial gain. This may be a desire to work with companies operating in a specific industry, to mentor a new generation of entrepreneurs that they see themselves in, or to find a new use for skills and experience they already have from working at one role for many years.
What Will Angel Investors Do in Exchange?
Angel investors who really take an interest in the business ventures they’re funding can spend hundreds of hours per year simply supporting investments. As they’re often experienced in the industries they’re helping, they may also spend this time doing the following:
- Taking an active management role in the business
- Offering strategies and advice on product and marketing
- Helping to coach your management team on things like financial literacy
- Providing access to social connections within your chosen industry
Angel Investors vs Venture Capitalists: What’s the Difference?
Both angel investors and venture capitalists look to provide funding for businesses, and they take risks in the hope of getting back a good return on investment (ROI). However, there are many differences in how both types of investors operate, when they’ll invest, and what they expect in return.
It’s important to know the key differences between the two before you try and get a loan or any other kind of funding for your business. This will save you time that might otherwise be spent on the wrong fit for your startup.
We’ve listed some of the main differences between angel investors and venture capitalists for you to consider below:
They Work Differently and Use Different Money Sources
The money used in angel investing is usually different to the money used by venture capitalists. This is because it’s provided privately, with the angel investor using their own funds and investing in their own name. Even if they’re operating as part of a business angel syndicate it will still be considered a private investment, as syndicates simply help to organise and coordinate individual deals.
The money offered by venture capitalists, on the other hand, is pooled from a range of sources, including investment companies, large corporations, and others who have chosen to contribute to the fund. Strictly speaking, venture capitalists act as “corporate angel investors”, in that their funds (venture capital trusts) are semi-regulated organisations with employees, partners, and a body of investors behind them.
Venture capital firms will invest money across a large portfolio of unlisted investments, and the best ones may have funding spread across as many as 100 individual companies or startups.
An investment made in a venture capital fund is completely passive, as the employees and partners of the firm will work to keep the investment monitored, help to engineer an exit strategy or strategies for individuals, and can also provide management expertise for the investee. By contrast, business angels will not have a company behind them and must source their own due diligence and legal advisors. They must also work closely with the entrepreneur they’re investing in, advising them and guiding them in the direction of the best outcome for their firm.
They’ll Invest at Different Times
Angel investors and venture capitalists will also tend to invest in businesses at different stages. Because of their focus on helping new ventures get off the ground, angel investors will provide money at the very beginning and in the early stages of a company finding its feet.
Meanwhile, venture capitalist firms are more likely to invest in businesses that are already established, in order to reduce the risk of losing out. As such, angel investors will often provide lower and more favourable terms than venture capitalists, as they are aware of the risks and are more likely to have a dedicated interest in the business itself, not just its viability.
They Will Invest Different Amounts
Angel investors will typically provide between £10,000 and £50,000 in the UK, though some may choose to invest as much as £150,000.
Venture capitalists will normally provide more than this because of how they work and how the funds are sourced. This number can range anywhere between £100,000 and £5m, though some London-based venture capitalists might offer sums as high as £50m to help businesses grow.
Advantages and Disadvantages of Angel Investors
Before looking at your options for investors for your business, you’re going to want to have an idea of all the pros and cons involved with each. We’ve listed some of the advantages and disadvantages you might find when working with angel investors here:
Advantages of Using Angel Investors
- Business angels work for themselves, so they’re free to make decisions on investments quickly
- There is often no need for collateral
- There are often no repayments, and no interest is necessary
- They can act as outside scrutiny, so you’re likely to get better discipline for problems in your business
- They can provide access to their sector knowledge and help you to connect with their contacts
- You’ll have access to them as a mentor, and they may even choose to provide their own management skills for your business
- There’s credibility in being associated with your investor
Disadvantages of Using Angel Investors
- They aren’t a suitable source of funding for investments below £5,000 or more than £150,000
- Working with a business angel will mean giving up a share of your company, and may mean giving up a large amount of control
- It may take you a long time to find a suitable angel investor for your business
- There will be less structural support available from a single business angel than there would be from an investing company
How to Find Angel Investors in the UK
“Angel investor” is a rather general term. Other than the criteria we’ve listed above, there aren’t any other defining factors that could make someone an angel investor. As such, it’s possible to find business angels to help your company take off in many different forms. These include:
- Friends and family, which is the most common source of funding for startups
- Crowdfunding, which is becoming more common and involves large groups of people investing small amounts of money online to reach a specific financial goal
- Wealthy individuals, which is the typical image you may have of an angel investor, and who may be willing to provide the large sum you need
- Groups or syndicates, as many angel investors are now choosing to work together, greatly raising the potential for the level of an investment
The latter of these can easily be found online in the modern day, and going to the Angel Investment Network is a brilliant way to begin, whether you’re looking to fundraise for your startup or to invest in someone else’s new business.
Deciding if an Angel Investor is Right for You
If you’re thinking about accepting an angel investor’s offer of funding for your business, there are a few steps you should take to help you decide if it’s the right call to make:
1. Make Sure You Have a Business Plan
Even before you think of approaching someone about funding for your business, you should have a comprehensive business plan in place for lenders and investors to see. Angel investors will want to see a complete, convincing plan when they meet with you, and you should ensure that any plan you offer them includes financial projections, plans for how the business will be marketed, and specific information on your planned target market.
2. Make Sure You’re Clear on What the Investor is Offering
You should be sure to put in writing what the investor can offer your business outside of financial backing. Many will expect to act as active angel investors, meaning they might have plans to act as a mentor, take a role as a manager in your business, or even serve on your company’s board of directors.
Setting out expectations and being clear on them in advance may help to clear up any confusion before work begins.
3. Make Sure You’ve Established Roles
Having a clear understanding of the roles that each person will have in your business is key, as some angel investors may bring in their own ideas for how to operate your business. Whether or not you choose to take these on board is up to you, but if you’ve established roles right from the start, you’re more likely to reduce the likelihood of conflicts at a later date.
What Questions Can You Expect from an Angel Investor?
When you first meet with an angel investor to discuss your startup and go over your business plan, you can expect them to ask a range of different questions that are related to your business.
Questions they may ask that are related to your company’s finances include:
- How much capital are you raising?
- How long will that capital last?
- What will your monthly burn rate be?
- Do you have detailed financial projections for at least the next two years?
- What are the key assumptions underlying your projections?
- What key cost components are there for your product or service?
- What are the unit economics?
- What are the likely gross margins?
Questions they may ask in relation to marketing and customer acquisition include:
- How does your company currently market or plan to market its products or services?
- What is your company’s PR strategy?
- What is your company’s social media strategy?
- What is the cost of a customer acquisition?
- What is the projected lifetime value of a customer?
- What advertising will you be doing?
- What is the typical sales cycle between a customer initially contacting you and closing a sale (also known as the customer journey)?
Questions they may ask about your management team and the founders of your company include:
- Who are the founders and key team members in your company?
- What relevant domain experience does your team have?
- What key additions to the team are needed in the short term?
- Why is the team you’ve put together uniquely capable of undertaking your company’s business plan?
- How many employees do you have in your company?
- What motivates you and the other founders?
- How are you planning on scaling your team in the next 12 months?
What Questions Should You Ask an Angel Investor?
You should also take any meeting time you have as an opportunity to ask your business angel some questions of your own. These may help you to decide if the investor is right for you and your business:
- How do you like to help your portfolio companies?
- How do you like to interact with your portfolio companies?
- How do you think you can be helpful to my growing business?
- What amount of follow-on investment do you think our company will need to succeed?
- What are your relationships with venture capitalists who would fund our next round?
- Can you refer me to other entrepreneurs you have worked with?
- What are your other investments in our space?
Before you go into a meeting with an angel investor, you should also make sure to research them. Look at their LinkedIn profile and their website to learn more about them and review the portfolio companies they have invested in before to see if your company is similar. If you share any connections on LinkedIn, you may consider asking them for insight or advice on the investor as well.
Looking for a Spot to Host Investors?
If you’re in the earliest stages of planning for your business and need a luxurious yet cost-effective spot in a prestigious part of London to impress investors, Halkin will be able to help. Our state-of-the-art meeting rooms are fully equipped with the technology you need to talk to potential investors all over the world, and our fantastic options for catering could see you standing out in the minds of the business angels that do make their way to you for a lunch meeting.
Contact us to book your slot in one of our rooms today and you’ll get to host the memorable meeting that will put your new business venture on the path to success (with the investment it needs) as soon as possible.